• Time to reset the rent?

Across all forms of operational real estate, the coronavirus lockdown has delivered a collapse in cashflow. Businesses are now realising that a form of greater shared responsibility should replace the traditional lease and fixed rent.
The traditional model has left many landlords battling to draw in rents due, while leaseholders with no revenues argue to be given leeway. The situation has been particularly prevalent in the retail sector, but in hotels too, Travelodge has been notable in arguing that it should not have to pay its fixed rents in full.
Yet it is in the hotel sector that some are already profitably operating new models, which could be rolled out more widely to align the interests of property owner, and property operator.
Effectively acknowledging the problem in retail, landlord Brookfield Asset Management has committed to plough USD5bn into a fund to invest in retailers. Ron Bloom, managing partner and vice chairman of Brookfield’s private equity group, is to lead its Retail Revitalisation Programme. “This initiative is being designed to assist medium-sized enterprises in getting back on their feet,” he said. “We believe this is a critical component to getting the economy moving again, and we would like to partner with companies and entrepreneurs that can draw on our capital and expertise to stabilize and grow their business.”
In February, the group co-invested alongside others in rescuing retail fashion brand Forever21 from bankruptcy, in the process ensuring the brand’s stores in its malls remained open to trade. Funds will not be available for start-ups: the group has said investments will be limited to businesses with at least two years of trading, in Brookfield’s core markets – and regardless of whether they are Brookfield tenants.
Brookfield has a track record of counter-cyclical investments, having invested in New York offices after the 2001 terror attack on the city. In 2018, its commitment to retail grew with the takeover of US mall owner GGP, which cost it around USD15bn and gave control of a portfolio of 125 retail malls. Today it has more than 170 retail property investments, both malls and flagship city centre stores.
Calls for a fundamental shift in the traditional landlord-tenant relationship are growing. Entrepreneur Luke Johnson, who has long experience paying high street rents via interests in chains including Pizza Express, Patisserie Valerie and Giraffe, sounded a call to arms in a May column, published in the Sunday Times.
“The coronavirus crisis is likely to mark a defining moment in the relationship between commercial landlords and their tenants,” he declared. “No other supplier of a product or service receives payment three months in advance, as landlords do; no other supplier has a contractual right to upwards-only reviews in pricing; and no other supplier typically serves a winding-up petition within a few days of the non-payment of a bill.”
“Tenants have been supplicants: often busy fools making no profits but still having to pay their bullying landlords, come what may. Unquestionably, the relationship has been an abusive one.”
And putting the view from the other end of the telescope, UK landlord Tim Vaughan, chief executive of Moorgarth Property Group, said in a Property Week column: “Most landlords have a genuine desire to secure tenants’ profitable performance, while carrying huge debts secured against their property, with interest and capital payments to be met.”
He said flexibility was being offered, but required action from both parties: “We agreed payment plans with many tenants, acknowledging they are under stress – and something is better than nothing. With those that refused to communicate or pay anything, our only option was to serve winding up orders or statutory demands to get them to the table.”
One solution to the combative approach that leases end up being, might be to take note of Scandinavian hotel group Pandox. Typically, it likes to sign lease agreements combining a base fixed rent, with an additional variable layer that is dependent on property performance, thus combining the interest of owner and operator – and obliging them to share property metrics. As Pandox operates a proportion of its hotels directly, it has good real time visibility of the market and a benchmark against which to compare performance.
According to Pandox CEO Anders Nissen, the base rent is typically lower in the Nordics, and higher in mainland Europe. In the current lockdown situation, the arrangement has meant fixed rent elements largely cover the group’s interest and other outgoings, at around SEK500m a quarter.
At the group’s recent quarterly results presentation, Nissen said he expects revenue-based payments to start flowing once more in the third and fourth quarters of 2020. His Nordic leases will start to pay their flexible element once occcupancy gets to around 40%, while those in Germany and the UK will not kick in until higher levels of bookings.

HA Perspective [by Chris Bown]: Lockdowns in Europe threaten to permanently wound traditional retail. Consumers prevented from physically visiting shops – apart from grocery stores and pharmacies – have been driven into online to get what they need. Will this new habit mean ever less visits to the high street? Probably yes, as new buying habits are formed. Amazon wins again.
The situation is particularly acute in the UK, which is the leading market for the switch to online retail. Many retail landlords have been in denial about the scale of the problem, and fiddled while their malls have gently emptied. It’s time for some brave moves, to recreate retail centres as places that give consumers compelling reasons for a visit.
So, time to end the hands-off, count the rent approach. And in its place, let’s have some Scandinavian cooperation. Working towards joint success, in a business arrangement that binds all parties to the same positive outcome, has to be the way to go.

Additional comment [by Andrew Sangster]: LXi REIT, the UK listed owner with a portfolio valued at the end of March this year at GBP914m, has a big exposure to hospitality with 24% of its assets being budget hotels and a further 12% leisure.
Its biggest tenant is Travelodge at 10% of passing rent. Premier Inn is 6% and Jurys Inn 3%. Not surprisingly, the REIT did not receive all its rents for the quarter at the end of March. But it received most. Outstanding was 6.8% of the annual rent roll (which would be 27.2% if there is the same result for the remaining three quarters).
Of the 6.8%, 3.6 percentage points of this, just over half, has seen terms agreed with tenants. These discussions saw just GBP100,000 given as rent concession out of the GBP1.7m represented, a rent rebate of less than 6%.
With the remaining GBP1.6m, LXi said it was in “detailed discussions with the tenants” and that it expects to receive the majority of this money “within 12 months”. LXi backed its words with action by only reducing its quarterly dividend by 10%.
The REIT further said that construction works were progressing at all of its forward funding sites. Out of the nine listed property sectors it invests in, LXi said its current preference was for discount foodstores, industrial / manufacturing and healthcare.
With Travelodge threatening another Company Voluntary Arrangement if landlords do not make major concessions, LXi is going to have its work cut out in negotiations. During its conference call to discuss its results it said it was confident about securing an agreement with Travelodge.
Simon Lee, fund manager, was full of praise for how Travelodge had transformed its business, going from an EBITDA of GBP35m and debt of 10 times in 2008 to and EBITDA of GBP140m and debt of 2.5 times. He said that in recent months the Travelodges in his portfolio had been outperforming the Premier Inns he owns. “They have become very lean and a much more efficient machine,” he said.
There was a veiled threat when he said that the Travelodge properties owned by LXi would work well for other operators such as Premier Inn and Accor. But he added it was “bloody unfortunate that [the argument about rent] has been played out in public”.

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